Fitch Affirms Indonesia's Spindo at 'A-(idn)'; Stable Outlook

Spindo's rating reflects its solid market position in Indonesia's steel sector, diversified revenue sources and stable conversion margin. This is counterbalanced by the high level of capex, which limits free cash-flow generation and keeps leverage moderately high.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Solid Position, Resilient Profile: Spindo has maintained its position as Indonesia's largest steel pipe maker. The company maintained stable sales volume and revenue growth, despite the global steel supply glut and without significant falls in average selling prices; Indonesian steel pipe products do not directly compete with imported Chinese steel, as they are on a different level of the value chain. Spindo's management sees a pick-up in infrastructure and high-rise projects and rising macroeconomic conditions, which support the furniture and automotive segments, as key to the company's growth.

Improving Profitability: The company's conversion margin, as measured by EBITDA/tonne, improved to 1.7x in 2015 after it obtained several small-scale high-margin oil and gas contracts earlier in the year. However, we expect Spindo's conversion margin to fall back to more sustainable levels of around 1.3x due to oil and gas sector weakness; the 8M16 revenue contribution from oil and gas was just 1%, compared with 13% in 2015. Nevertheless, this is still an improvement from 1.0x in 2012 and is underpinned by the company's ability to pass on raw material fluctuations to customers.

Diversified Revenue Sources: Spindo derives its revenue from various industries, including construction (62%), oil and gas (1%), furniture (19%) and automotive (19%). The company's revenue picked up by 6.4% in 2015, with a 20% increase in sales volume, following a 4.7% revenue decline in 2014 due to slowing business activities as a result of the presidential elections that took place at the time. We believe medium-term sales growth will be supported by recovering automotive sales, with the company hoping to tap into the four-wheel drive segment, rising infrastructure development and consumer confidence. This should offset the fall in oil and gas projects.

Restructured Capex Plan: Spindo has revised its capex timeline, as it considers a step-by-step outlay for machinery as more prudent due to unconducive oil and gas industry conditions. The new timeline lowers 2016 and 2018 capex, as the company does not plan to acquire the machinery until 2017, with additional purchases in 2019 and after. The company also plans to allocate more capex to warehouses, which will improve its competitiveness by reducing product delivery time and cost. Nonetheless, Spindo's capex remains high and Fitch expects moderately high leverage and negative free cash flows during 2017-2019.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Spindo include:

- USD/IDR at 13,300

- 30% dividend payout ratio

- total capex of around USD1.5bn over 2016-2019

- CAGR of 21% in sales volume from 2015-2019

- 6%-7% average selling price decline in 2016, flat in 2017 and 1% growth in 2018-2019